October 23, 2018

LAM | Media Firms are Acquiring Their Way to Reclaim the Cord Cutters

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Bucking to catch up to Netflix, traditional media firms are risking indebtedness, antitrust lawsuits and reputation to enter the streaming market via assertive acquisitions. The speed and aggression of these deals are notable.

Disney is seeking to acquire 20th Century Fox, and along with it, a majority stake in Hulu, for $71.3 billion. In the meantime, Time Warner was bought and rebranded over the summer as WarnerMedia by AT&T for $87.5 billion. Comcast, unfazed by its failed Fox bid, is now trying to buy Sky, a European satellite TV company for $40 billion. Unsatisfied with earning just Netflix licensing fees for their content, these companies are buying their way into the over-the-top field, characterized by subscription fees and online streaming that bypasses traditional telecommunication channels like cable. From my perspective, the strategy across these deals are twofold: these companies want to expand their content offerings and vertically integrate themselves as a platform that is directly facing consumers.

Just look at Disney’s deal, which has expanded their content library drastically. Over the summer, Disney announced its bid for 21st Century Fox, edging out Comcast’s all-cash proposal of $65 billion. They didn’t want all of Rupert Murdoch’s empire, however. After the transaction, Murdoch keeps the Fox News Channel and Fox television stations around the country, while Disney leaves with content assets like the 20th Century Fox movie studio and FX television network. Disney clearly had no intention of getting into the conservative cable news business and instead just wanted valuable movies and television assets to flow into their upcoming OTT platform. Originally confined to children’s content, the company can now offer a myriad of films for mature audiences, from The Sound of Music to Deadpool and everything in between. Additionally, Disney will be getting majority stake in Hulu because it will own Fox’s shares in the streaming platform, along with its existing stake. Unsurprisingly, Disney expects to launch its streaming service in 2019, and this merger was strategically planned beforehand to give its release a bang.

Although a very different transaction by definition, AT&T bought Time Warner for similar reasons. Along with DirecTV, which it bought in 2015, AT&T is now even closer to the consumer by not only providing access to content (streaming, cable via DirecTV), but now creating the content itself (Warner Media). Like Fox, Time Warner owns diverse content that rival that of Netflix in quality and popularity, including HBO hits like Game of Thrones and Warner Bros. movie franchises like the Harry Potter series. Interestingly enough, CNN is also owned by Time Warner, which adds a strong news arm to AT&T’s portfolio. Not surprisingly, Warner Media also plans to release a direct-to-consumer streaming service next year.

The pattern is clear: they are all gunning to add to their business a Netflix service, which excels at both content variety and seamless platform. Large M&A deals are often fraught with difficulties, however, and many risks lay ahead. First, the transition of content to distribution must be seamless. In other words, their direct-to-consumer platforms cannot be made on the cheap. One of the successes of Netflix is its intuitive, beautiful user interface. You want to see a program?  Simply browse, click and it plays instantly, with no interruption. To build a strong user base, traditional firms like Disney and AT&T have to offer an option that has usability and performance that are at least on par with Netflix. To really compete with Netflix, the user experience, along with the offerings, has to be even better.

Culture clashes also cannot be ignored and many a mergers have failed simply because of this fact of life: people don’t always get along. Work styles differ and communications between two parts may falter. Fears of layoffs may also be keeping workers from operating at their best. With such drastically different businesses involved in a vertical integration, it may be best to simply to leave the target alone. This hands-off approach seems to be AT&T CEO Randall Stephenson’s direction, especially with regard to CNN’s journalistic independence. Keeping Time Warner largely separate seems to be for the best, at least in the near future.

The second “Golden Age of TV” is a time of flourishing in the industry and also immense uncertainty. In a market where consumers are demanding premium content but also flexible and cheap access, traditional media companies are aggressively fighting back with a vengeance to reclaim cord cutters. For example, AT&T seems to be able to stem the tide with with an increase in DirecTV Now streaming subscriptions that is offsetting DirecTV cable subscribers leaving by the thousands everyday. Profitability, however, remains an issue due the to low prices of these streaming plans. So, these costly acquisitions seem to be the way forward, and consumers are certainly benefiting from more choices and probably lower prices for their entertainment in the near future. Whether such moves will create long term success and profitability for these new vertical integrated media companies, however, remains to be seen.

Matthew Lam is a senior in the College of Arts and Sciences. The Despatch Box runs every other Wednesday this semester. He can be reached at mlam@cornellsun.com